Part I: Compute the worth of Arcadia Hospital in 2005 using rules of thumb, adjusted book value, and discounted cash flow valuation (for this final method, use the table provided). Assume the cash flow for 2005 is the same as 2006.
1) Rules of thumb:
2) Adjusted book value:
3) Discounted cash flow:
Cash Flow amount
Capitalization Rate
Value
6%
8%
10%
12%
Part II: Compare your findings for each valuation method, and discuss any differences or similarities between the calculated values. What method do you think gives the most accurate picture of the worth of Arcadia in 2005? Explain your answer.
Operating Revenues 2005 % of rev Budget Over/(Under)
Patient revenues 500 550
less: Allowance for doubtful accounts 13 14
equals Net patient revenues 488 536
Other Income:
Investments 75 60
Misc 5 0
Total Operating Revenue 568 100.00% 596
Operating expenses:
Wages 200 35.24% 180
Taxes & Benefits 75 13.22% 70
Temporary/Contract Labor 5 0.88% 0
Medical/surgical supplies 25 4.41% 30
Other misc supplies 5 0.88% 5
Dues/subscriptions 3 0.53% 3
Transcription expense 10 1.76% 15
Leases & rentals 50 8.81% 45
Malpractice Insurance 75 13.22% 70
Other Insurance 30 5.29% 32
Professional Fees 20 3.52% 20
Utilities 15 2.64% 10
Maintenance & Repairs 15 2.64% 10
Depreciation/Amortization 7 1.23% 7
Interest Expense 1 0.18% 1
Total Operating Expenses 536 94.45% 498
Net Income 32 5.55% 98
To compute the worth of Arcadia Hospital in 2005 using different valuation methods, we have three options: rules of thumb, adjusted book value, and discounted cash flow valuation.
1) Rules of Thumb:
Rules of thumb involve using industry benchmarks or general guidelines to estimate the value of a business. These benchmarks can be based on variables such as revenue, net income, or industry-specific multiples.
Since no specific rules of thumb are provided in the given information, we cannot compute the worth of Arcadia Hospital using this method.
2) Adjusted Book Value:
Adjusted book value takes into account the historical cost of assets and liabilities but adjusts them to their current market values. This method factors in any changes in the value of assets or liabilities since their acquisition.
To compute the adjusted book value of Arcadia Hospital, we need to subtract the accumulated depreciation from the original cost of the hospital's assets. However, the information provided does not include the original cost or accumulated depreciation of assets, so we cannot compute the worth using this method.
3) Discounted Cash Flow Valuation:
Discounted cash flow (DCF) valuation determines the present value of expected future cash flows generated by the business. This method considers the estimated future cash flows, the expected growth rate, and a discount rate to account for the time value of money.
Given the cash flow for 2006, we can assume the cash flow for 2005 to be the same. Using the table provided, we can calculate the value of Arcadia Hospital in 2005 based on different capitalization rates and discount rates.
To compute the value using DCF valuation, we multiply the cash flow amount by the corresponding capitalization factor or discount rate. The capitalization factor for a given capitalization rate is calculated as 1 divided by the capitalization rate. The discounted value is obtained by dividing the cash flow amount by the discount rate plus 1 raised to the power of the number of years into the future.
For example, using the cash flow of $32 for 2005:
- For a capitalization rate of 6%, the value would be $32 divided by 0.06, which is $533.33.
- For a discount rate of 8%, the value would be $32 divided by (0.08 + 1) to the power of 1, which is $296.30.
- We can calculate the values using the same method for the other capitalization rates and discount rates provided in the table.
Part II: Comparing the Findings:
Based on the information provided, we cannot accurately calculate the worth of Arcadia Hospital using rules of thumb or adjusted book value, as the necessary data is not available. However, we can calculate the value using discounted cash flow valuation.
Each valuation method provides different perspectives on the worth of the business. Rules of thumb rely on industry averages and may not capture the specific characteristics of Arcadia Hospital. Adjusted book value considers the current market values of assets and liabilities but requires accurate data on asset cost and depreciation. Discounted cash flow valuation takes into account the expected future cash flows and incorporates the time value of money.
The most accurate method to determine the worth of Arcadia Hospital in 2005 would likely be discounted cash flow valuation. It considers the specific cash flow of the business, potential growth, and a discount rate that reflects the risk and opportunity cost of investment. However, the accuracy of the valuation ultimately depends on the accuracy of the assumptions made regarding cash flows, growth rates, and discount rates.